Offshore Payroll Considerations for Growing Multinational Businesses

Whether you’re establishing operations in one or 10 countries, there’s a chance you’ll have to evaluate offshore payroll options. Offshoring is a growing trend in globalization, as more companies explore their options for hiring diverse talent for either a lower salary or a different skill set that may not be available in their home country. According to a report by OECD, offshoring is the total or partial transfer of a service to a new country. This can be to an existing or new entity, or through subcontracting to non-affiliated companies.

For this post, in particular, we will not be referring to offshore payroll as a specific term for paying offshore drilling employees, but more as a general term encompassing the following distinctions. If your company is using external production abroad, then offshore payroll is not a factor because you’re engaging with them as a contractor. Now if you’re doing in-house production abroad, then offshore payroll will be a hot topic soon because you’ll have to pay permanent employees.

Offshore Payroll Considerations:

Local Entity Set-Up, Compliance, and Management

First, you’ll need to determine how you’ll be hiring employees in your new jurisdiction. In most cases, especially when hiring larger teams, you’ll be required to have a legal entity in-country. Companies do tip-toe around this requirement without registering with the local government by hiring a temporary employee as a contractor to test out the market. But there are risks involved, specifically around managing compliance.

If you decide to hire full team members, you’ll need to either establish a legal entity in-country or use a service such as International PEO (Professional Employer Organization) to leverage already established infrastructure in your target market. In this post, we outline the pros and cons of establishing an entity in-house.

A service like International PEO can be beneficial if you’re new to the market or performing a test before making a full commitment. Essentially, you’re working with a third-party provider to hire your employees through an already established legal entity. You’ll have full control of them on a day-to-day basis and the service manages compliance regarding labor laws. It’s important to note that if your company is manufacturing while holding physical assets in the company (think real estate, buildings, tooling, etc.) International PEO may not be viable and you will need to establish a legal entity.

You can also choose to use a hybrid model in which your company owns the foreign entity and uses outsourced services, such as offshore payroll. While offshoring may get a bad rap from some for its corporate tax savings, many companies benefit by taking advantage of skilled talent and new resources in their new countries.

Payroll Considerations

On the token of establishing a legal entity, you’ll need to determine the type of establishment required for your needs before making commitments to hire. Without proper registration, a company will often incur higher taxes and face significant liabilities. Issues can be easily avoided if your team creates the proper structure before starting operations. Also, your organization must secure the proper employee registrations, based on your target country, before onboarding new team members.

In addition to determining the legal presence, you’ll also need to start thinking about how to manage your international payroll. To avoid errors and timeline issues, it’s best to use a consolidated global payroll service – a single source that manages payroll for all of the organization’s international operations. Consolidating your payroll into one provider helps to completely reduce silos and make payroll less complicated, less risky, and less painful.

When you manage offshore payroll with a consolidated service, you can also reduce stress on your HR team by giving them one service to report to and report out, which will help streamline services overall.